Calif. Firm Finds Niche With ‘Premium Properties’

By Sarah Baker

Investment firms nationwide are snatching up single-family real estate-owned (REO) properties, renovating and renting them, and then selling them to other investors.

This “house flipping” is seen as especially opportunistic in Memphis, where median asking prices are dwarfed by national averages and vacancies are widespread.

Some 63,751 homes in the county are non-owner-occupied, according to real estate information company Chandler Reports, www.chandlerreports.com. That translates to 23 percent of Memphis’ total housing stock.

While many of the companies active in the local market right now are based here and chase houses with low price ranges, there’s at least one player in the game that has a slightly different strategy.

Meridian is based in San Diego but has its operations office at 2657 Appling Road in Memphis. The company was formed by technology veterans Jeffrey King and Kevin Conlon in 2006 and entered Memphis in 2008.

“As we formed this real estate investment business, we analyzed all 366 of the metropolitan statistical areas nationwide and chose Memphis as one of two places we wanted to operate,” Conlon said. “We think it’s one of the best places in the country to invest strictly for very data-driven reasons – median home prices, taxes, insurance, climate and geographic factors, status of the local economy and what underpins the economy.”

Meridian is active in the ZIP codes that encompass mostly Bartlett, Cordova and Southeast Memphis – the 38125 side (Southeast Shelby County) as opposed to 38141 (Hickory Hill South). The company closed on 60 houses in 2011, and expects to grow this year by as much as 20 percent.

While it would seem at first that the numbers wouldn’t work quite as well with more expensive homes, it’s been Meridian’s experience that an investor will see lower vacancy and lower maintenance costs in those properties that command higher rents.

The firm aims for a rent ratio – the monthly rent divided by the purchase price that an investor would pay – to be above 0.95 percent. For investors long-term, Conlon said, that ratio will yield better odds of having property values maintained and appreciate.

“The people who can afford those higher rents have higher incomes and hold more responsible working conditions,” Conlon said. “They tend to be very good about paying rent on time and they take pride in where they live. Consequently, the maintenance expenses tend to be a little lower in those neighborhoods as well.”

One of the key points Meridian mentions to investors is that it is important to have a retail exit strategy when the market turns around. The company does not believe this is possible in the sub-$80,000 market and believes many investors who purchase in that price range will not be able to sell their asset when necessary.

“When you go to sell a property today in Memphis and it’s, say, a $60,000 property, there aren’t a lot of people who can buy those properties as homeowners, where they intend to occupy the property that they purchase,” Conlon said. “Generally speaking, you’re going to have to sell to another investor, and investors are pretty tough on the pricing that they will accept for taking on the risk associated with those lower-price properties.”

Like other investment firms in town, Meridian is seeing heightened competition in the market, yet the nature of the competition is different. Since the homes are more expensive, it’s more capital intensive to operate in the higher-end of the price range, and therefore Meridian is often bidding against homeowners rather than other investors.

Because for the median-income family, housing affordability is at record highs, according to a Monday, May 21, report from the National Association of Realtors.

Nearly 78 percent of all new and existing homes sold in the first quarter were affordable to families earning the national median income of $65,000, the National Association of Home Builders/Wells Fargo Housing Opportunity Index shows.

The majority of Meridian’s clients are from the U.S. and are “accredited investors” – meaning they have household incomes above $200,000 and/or a net worth above $1 million.

With that type of clientele, about a quarter of the firm’s clients pay cash while the others choose to finance. Even those who can afford to pay cash often finance properties (typically Fannie Mae-backed loans) because they get higher cash on cash returns when they leverage.

“When you put a small amount of money down to control an asset that’s worth several times the amount you put down, that’s leveraging,” Conlon said. “And when you do that, you have the opportunity to get higher returns. It’s a higher risk way to do it, but it’s also a higher return way to do it.”